Indian Equity Market Research Articles

Is Gold a Safe Haven in all Currencies?

This paper shows that gold’s safe haven property crucially depends on gold’s exchange rate with the respective currency for local investors. A sample of 68 international equity market indices demonstrates that currencies significantly affect the strength of the safe haven effect, enhancing or diminishing the effect. Volatile and “risk-on” currencies boost gold’s safe haven property while “risk-off” currencies weaken the safe haven effect.

An Assessment of Gold as a Hedge or Safe Haven: Evidence from Major Gold Producing Countries

In the era of globalization, co-movement among the various financial assets has increased drastically and diversification benefits have reduced. Further, increased uncertainties in the financial system posed a serious challenge to researchers and investors in the search for alternative avenues for safeguarding their wealth and risk management. Therefore, using daily time series data that spans from January 2000 to March 2020, the study assesses the role of gold as a hedge and safe haven against equity market indices of major gold producing countries. The GARCH model, which covers average gold returns, highlighted the hedge and safe haven ability of gold in different quantiles of the return distribution. The results revealed that the severity of shock rarely matters in capturing the demand for safe haven assets. Additionally, a comparative analysis during crises evidenced a more heterogeneous and larger effect during the dot-com bubble burst in comparison with other selected crises. The robustness analysis through wavelet coherence with the predominance of red bounds and westward-facing arrows indicates the strong safe haven effect of gold during most of the crisis periods in the cases of Australia and South Africa. Furthermore, an improved understanding of such hedge and safe haven behavior patterns may have substantial implications for hedgers, portfolio managers, investors, and policy makers.

Impact of the COVID-19 on MSCI world equity market index

Impact of the COVID-19 on MSCI world equity market index

The Rollout of GST and its Impact on the Auto Sector Stocks of National Stock Exchange

The most awaited and the biggest indirect tax reform in India – Goods and Services Tax (GST) was finally introduced on July 1, 2017. On contrary to the expectations, the automobile industry had severe hiccups during the latter part of 2018, and experienced negative sales growth and the people were jittery about the process of implementation of GST in India. The present study was dedicated to assess and compare the returns rendered by the auto sector stocks listed in the Indian equity market, pre-and postimplementation of GST in India and to understand the level of volatility in the price behaviour of the selected stocks during the study period. To achieve this, we used the daily closing prices of the constituent stocks of auto sector index of National Stock Exchange for 90 trading days pre and post the execution of GST (from February 20, 2017 – November 9, 2017) and relevantly applied the GARCH family models to understand the existence and extent of symmetric and asymmetric volatility in the auto sector stocks. We found that the implementation of GST in India showed a negative impact on the returns delivered by the auto sector stocks and also found abnormal and heightened volatility during the post GST period.

Investor Herding Behaviour in the Indian Equity Market: Evidence From Quantile Regression

The study empirically investigates the herd behaviour of investors in the The the Indian equity market. Quantile regression approach is adopted over OLS (ordinary least square). The method proposed by CCK (Chang, Cheng and Khorana, 2000), based on cross sectional absolute deviation is used. An empirical examination of asymmetric effect on returns, high and low trading volume and volatility over daily data period from 2007-2017, shows reverse herding behaviour in the The the Indian equity market. The robustness analysis of large, mid and small cap firms also revealed evidence against herding. However, sub-period analysis of data revealed evidence of herding in many years (2007, 2010 and 2014 etc.). In general herding behaviour is not pervasive in the The the Indian equity market.

Modeling Skewness in Portfolio Choice

Despite half a century of research, we still do not know the best way to model skewness of financial returns. We address this question by comparing the predictive ability and associated portfolio performance of several prominent skewness models in a sample of ten international equity market indices. Models that employ information from the option markets provide the best outcomes overall. We develop an option-based model that accounts for the skewness risk premium. The new model produces the most informative forecasts of future skewness, the lowest prediction errors and the best portfolio performance in most of our tests.

World equity markets and COVID-19: Immediate response and recovery prospects

Following the spread of the COVID-19 pandemic, most global equity market indices experienced significant falls. Recognizing the severe economic impacts of the pandemic, starting from mid-March, many governments announced unprecedented economic rescue packages, which appear to restore investors’ confidence, given the recoveries recorded in most stock markets. However, the recovery performance significantly varies across countries. This paper provides an empirical analysis on what may explain this variation in the recovery performance observed in equity markets across countries. We find that among different types, fiscal stimulus supports seem to be strongly and positively associated with higher recovery that may justify more targeted fiscal supports for the real sector firms to restore investors’ confidence. We also find that the severity of the outbreak, reliance more on natural resource and tourism revenues are negatively associated with countries’ stock market recovery performance.

A dynamic relationship between crude oil price and Indian equity market: an empirical study with special reference to Indian benchmark index Sensex

PurposeThe purpose of the study is to investigate the long-run and short-run dynamic relationship between crude oil prices and the movement of Sensex for the period of 2000–2018.Design/methodology/approachThe study uses the augmented Dickey–Fuller test for the presence of unit root, Johansen cointegration test for estimating the cointegration among the variables. Further, in the case of no cointegration found, the study employed the vector autoregression (VAR) model to estimate the long-run relationship and the Granger causality/Wald test for short-run relationship. The study also conducted tests for the prerequisites of the model: serial correlation, heteroskedasticity and normality of data.FindingsThe study found that both the variables, crude oil prices and Sensex are integrated of order 1, that is, I (1), and there is no cointegration between them. Further, the results proliferated from the VAR model unfold the marked effect of previous month crude oil prices (lag 1) on the movement of Indian stock market represented by Sensex considered as the benchmark index. Furthermore, VAR–Granger causality/block exogeneity Wald tests results indicated that there is a causal relationship between the crude oil prices and Sensex under the VAR environment. The model does not have any serial correlation and heteroskedasticity indicating toward the unbiased and robust estimates.Research limitations/implicationsThe study is conducted till the year 2018, and data for the present period (post-2018) is excluded due to ongoing trade issues between the USA and oil-exporting countries such as Iran. The current COVID-19 outbreak has also put serious issues. Due to limited time and availability of standardized data, researchers have considered Sensex as equity index only, but for more generalized research outcome few other equity indexes could have been taken for study.Originality/valueThe study is completely original in nature and is an extensive study of the relationship between the crude oil price and Indian stock market with reference to causality between the variables.

Do Prestigious Underwriters Shape the Performance of SME IPOs in India?

The present article aims to examine the impact of underwriter reputation on underpricing and long-run returns of small- and medium-sized enterprise (SME) initial public offerings (IPOs) over a 12-month period in an emerging country like India on a sample of 403 IPOs issued from 2012 to 2018 and subsequently listed on Bombay Stock Exchange (BSE) small and medium enterprise (SME) platform and National Stock Exchange (NSE) EMERGE. However, the migration of 27 SME IPO companies to main platform has resulted in reduced sample size of 376 IPOs for measuring long-run performance. The current study has utilized ordinary least square regression technique to investigate the concerned relationship. The robustness of the findings has been further ensured by checking for endogeneity bias using two-stage least square regression (2SLS). The results unveil that while underwriter reputation positively influences underpricing of SME IPOs, it has no significant impact on their long-run performance. This analysis may provide some meaningful information for policymakers responsible for reforms of Indian equity market. For SME issuers, the findings may provide some insights on the importance of hiring reputed underwriters in IPO process. The results may further assist the investors in improving their equity valuation and taking informed investment decisions.

The Impact of Currency Fluctuations on Equity and Debt Market

Purpose: This study attended to investigate the impact of currency fluctuations on equity and debt markets. Furthermore, the study deals with investments in equity considering the currecy as rupee vs. dollar relationship. The European Central Bank has been considered for the external debt market investments considering the euro as the currency. The study mainly focused on the impact of rupee vs. dollar on equity and the euro impact on ECB for debt market investments. Design/Methodology/Approach: The tools applied are Bivariate Correlation, Ordinary least square method, ARCH model and Vector autoregressive model. Findings: The study reveals that from 2008 to 2019, the bivariate correlation result indicates that equity investments have a significant relationship with the rupee vs. the dollar. It has been observed that the euro has also a moderate relationship with the debt investments and the OLS result indicated that the euro impact on debt investments is observed to be insignificant. The ARCH result stated that the currency is having a significant effect on the fund's volatility. The VAR estimated that future equity and debt markets are expected to go up shortly. Practical Implications: The present study result stated that the rupee vs. dollaris having the impact on the equity investments but the euro impact is observed to be insignificant. Therefore, the equity investors should focus more on the rupee vs. dollar fluctuation, so that inflows and outflows of FII funds in to Indian equity market can be identified. Originality/value: The present study added the scholarly value to the equity markets with regard to the currency fluctuations effect on the equity and debt market investments. The investors of equity and issuers of ECB’s investments can consider this study for their decision making.

Herding in Fast Moving Consumer Group Sector: Equity Market Asymmetry and Crisis

This study empirically examines herd behavior for fast moving consumer goods (FMCG) sector stocks under varied market return conditions and the period during the global financial crisis and its aftermath. We examine the sample of stocks trading on the Nifty FMCG Index of the Indian equity market from January 2008 up to December 2018 using the dispersion measure of cross sectional absolute deviation and examine its relationship with the market return to explore herd phenomenon. Quantile regression estimate is used and the results of the study validate rational asset pricing models as the sector does not display herding. In contrast, anti-herd behavior at lower and median quantile values is observed. A possible reason can be the non-cyclical nature of the industry where investors rely more on the fundamentals rather than crowd chasing. We also findthe absence of herd phenomenon during the market asymmetries of bull and bear phases, extreme movements, the period of the global financial crisis, and afterward. We further examine herding under the impact of the information technology (IT) industry and conclude that significant return movements in IT sector impact dispersions in the FMCG industry. Also, there is a co-varying risk between the two sectors confirming the spillover in an integrated market.

Performance of VC/PE-backed IPOs: New Insights from India

This article explores long-term equity and operating performance of Indian firms issuing initial public offerings (IPOs) backed by venture capital/private equity (VC/PE) funding. Using data for 173 IPOs backed by VC/PE funding during 2000–2016, the article shows that equity market performance of VC/PE-backed IPOs is unimpressive post issue, compared to their peers. This is not only due to market perception but also associated with a declining operating performance. However, information asymmetry, mispricing and ‘timing the market’ by issuing firms do not seem to be the reasons for such long-term underperformance. We argue that it may be a case of too much money chasing too few winners for Indian IPOs and individual rent-seeking activities by managers. The observation raises the question of effectiveness of the monitoring role of venture capitalists or PE funders post the IPO in an Indian context. This is substantiated by our additional finding that sustained monitoring and hand-holding by venture capitalists and PE funders post the IPO cause an improvement in performance. The findings of this study can have significant implications for all stakeholders, particularly common investors in the Indian equity market.

Measuring liquidity in Indian stock market: A dimensional perspective.

Market liquidity ensures the marketability of security and is an indispensable feature of stock markets. Previous studies have emphasized the role of stock market liquidity in empirical finance. However, they have inadequately explored its multidimensional nature. This study eliminates the ambiguities related to market liquidity by precisely measuring it by using popular and proven liquidity measures. As such, the present study aims to evaluate market liquidity in terms of depth, breadth, tightness, and immediacy in the Indian equity market and also identifies crucial interdependencies between liquidity dimensions. The study selects 500 stocks constituting the NIFTY 500 index of the National Stock Exchange, India, as of 26th May 2019. The data on trading volume, bid price, ask price, the number of shares outstanding, closing share prices were retrieved for the period from 1st April 2009 to 31st March 2019. The study employs Share Turnover, Amihud Illiquidity Ratio, Relative Quoted Spreads, and Coefficient of Elasticity of Trading for liquidity measurement. The Vector Auto-Regressive (VAR) model is used to establish the simultaneous relationships between liquidity dimensions. The analysis is conducted at the aggregate market level as well as across turnover based stock groups divided based on their rankings in terms of stock specific share turnover. The empirical results evidenced the presence of consistent depth, strong breadth, and immediacy but lower tightness in the Indian equity market. The market depth and tightness appear to be relevant in determining dimensional interdependencies. Also, less frequently traded stocks exhibit higher illiquidity in the wake of lower tightness. The findings of this study will assist the investors to wisely understand the multifaceted nature of market liquidity and base their trading decisions accordingly. Moreover, the regulators of the stock exchange can devise liquidity enhancing policies based on the directional movements among liquidity dimensions.

Dynamic co‐movements across forex, gold, crude oil and Indian equity market

The research seeks to assess whether the Indian capital market is following a sustainable equilibrium relationship with gold, oil and currency exchange in long and short intervals or not. The study uses autoregressive distributed lag (ARDL)‐unrestricted error correction model (UECM) Bounds test over 25 years from 1990 to 2016. The result indicates that equity indices are cointegrated and has a relationship for a long run with gold and currency exchange. Volatility in gold prices and currency exchange affects equity performance for a long and short interval of time. Only oil price movements affect the currency exchange rate in long‐run. No other variable makes any impact on it in short‐run. The outcome supports gold that appeared as an alternative investment asset class in the investors' community. The report features the necessity to structure policies so that currency exchange gestures and financial return volatility can be monitored and controlled with gold and oil prices as instruments.

Are idiosyncratic risk and extreme positive return priced in the Indian equity market?

In this paper, we examine whether the IVOL (Idiosyncratic Volatility) and MAX (Extreme Positive Return) can predict future returns in the Indian stock market where a short sale is restricted with no naked short sale allowed. We find that both IVOL and MAX have significantly positive and persistent effects on expected returns in this market. In subsamples, we document that small firms have positive IVOL and MAX effects. However, more interestingly, after including all the controls, in contrast to the finding of Bali et al. (2011), the IVOL and MAX effects are significantly negative for the large firms in this market implying the investors’ response to IVOL and MAX with the perception of low growth prospects of large firms. We use both portfolio level and firm level Fama Macbeth cross-sectional analysis to show the effects.

Tail risk and return predictability for the Japanese equity market

This paper studies the predictability of the Japanese equity market, focusing on the forecasting power of nonparametric volatility and tail risk measures obtained from options data on the S&P 500 and Nikkei 225 market indices. The Japanese market is notoriously difficult to forecast using standard predictive indicators. We confirm that country-specific regressions for Japan – contrary to existing evidence for other national equity indices – produce insignificant predictability patterns. However, we also find that the U.S. option-implied tail risk measure provides significant forecast power both for the dollar–yen exchange rate and the Japanese excess returns, especially when measured in U.S. dollars. Thus, the dollar-denominated Japanese returns are, in fact, predictable through the identical mechanism as for other equity market indices, suggesting a high degree of global integration for the Japanese financial market.

Beta-Anomaly: Evidence from the Indian Equity Market

The study investigates the existence of beta-anomaly in the Indian equity market. A growing body of literature shows that financial markets do not reward the risk (defined in terms of standard deviation or market beta). These results (known as ‘low-risk anomaly’ and ‘low-beta-anomaly’) are quite puzzling from the theoretical perspective. This study presents an empirical test of the capital asset pricing model (CAPM) in the Indian equity market to examine the existence of low risk/low beta anomaly. The study covers 650 actively traded stocks for a period of 189 months from July 2002 to March 2018, and the Fama–MacBeth procedure has been used for testing CAPM. The beta-shorted portfolios are formulated using both equal and value-weights. The results of the study were found robust after controlling for outliers and correcting the bias in standard errors, as suggested by Petersen (in Rev Financ Stud 22(1):435–480, 2009). We confirm the presence of ‘low-beta-anomaly’ in India. A non-linear relationship was found between CAPM beta and expected returns. This relationship follows a quadratic function, where expected returns initially increase with beta and then start declining, resulting in the negative risk premium for high-beta portfolios.

Size Effect in Indian Equity Market: Myth or Reality?

This study revisits size effect and its associated issues, in the Indian market, as recent studies question the persistence of size premium in the global context. We use data from NIFTY 200 stocks for the period 2005 to 2018 and find size effect to be significant for both market-based and accounting-based measures of size. It is not impacted by any definitional issues as highlighted by Berk (Financ Anal J 53(5):12–18, 1997). Size effect also remains significant despite alternative portfolio constructions i.e. forming quintiles, deciles, scores of portfolios even though the premiums vary. Existing literature on size anomaly does not focus on size drift and survivorship bias. We specifically address these dimensions relating to size effect which have received less attention in prior work. In this study, size effect is found to be sensitive to drift in market capitalization. Historical market capitalization used to categorize medium (large) firms may now be a basis for classifying small (medium) firms in recent time periods. Small sized portfolio adjusted for drift provides substantially higher return compared to unadjusted small sized portfolio. Further, to evaluate survivorship bias, size-based portfolios are redesigned using changing components of NIFTY 200 for each formation period. This leads to considerable weakening of size effect. Investors must take this fact into consideration while creating size based portfolios. However, upon using another stable universe of F&O traded stocks, size effect is found to be significant. The study contributes to size anomaly literature for Indian market and shall be useful for portfolio managers, investors, academia and regulators.

Intraday Variability and Trading Volume: Evidence from National Stock Exchange

In this article, we investigate patterns in returns, volume and volatility and analyse the volume–return relationship using tick-by-tick data from the Indian equity market. Based on descriptive measures and regression frameworks, we document three important findings. First, we report unusually high volatility, trading volume and number of trades during the opening and closing minutes of the market depicting a ‘U’-shaped curve, implying high market activity during these periods. Second, while accounting for trading volume, we observe that volatility is not significantly different between mid-day period and evening period as compared to the normal ‘U’ curve. Finally, we document a significant positive relationship between intraday volume and price movements controlling for microstructure effects. The impact of positive returns on trading volume is higher than the impact of negative returns, implying the presence of return–volume asymmetry in the Indian market. JEL Codes: G12, G15

The relationship of domestic institutional investors and India stock market returns: An ARDL bound testing approach

Purpose This study explores the relationship of investment done by domestic institutional investors (DII) and stock market returns. The paper covers a bigger definition of DII’s, bifurcating them into four categories, (a) mutual fund, (b) venture capital fund, (c) financial institutions and (d) insurance companies who have invested in national stock exchange of India. Design/Methodology The study uses CNX Nifty 50 to represent the stock market of India. ARDL bound testing cointegration model is applied to find the relationship between the Dependent variable (nifty 50) and Independent variables (mutual fund, venture capital fund, Indian financial institution and insurance companies) Practical implication This analysis will help regulatory authorities to improvise on policy making on investment in stock market for insurance companies, financial institution, venture capital fund and mutual fund. The surge in domestic institutional equity inflows, will help to insulate the Indian equity market from the high velocity traders of overseas. Originality/value This is the first study to undertake domestic institutional investors at a disintegrated level.